Are Hedge Fund ETFs Working?

Are hedge fund-oriented strategies, as implemented by exchange-traded funds (ETF), attractive? To investigate, we consider 10 ETFs, five live and five dead (in order of inception dates):

• NYLI Hedge Multi-Strategy Tracker ETF (QAI) – seeks investment results that track, before fees and expenses, the price and yield performance of the NYLI Hedge Multi-Strategy Index, which attempts to replicate the risk-return characteristics of hedge funds generally.
• ProShares Hedge Replication (HDG) – seeks to track, before fees and expenses, an equally weighted composite of over 2000 hedge funds.
• NYLI Merger Arbitrage ETF (MNA) – seeks to track, before fees and expenses, the price and yield performance of the NYLI Merger Arbitrage Index, which: (1) invests in global companies for which there has been a public announcement of a takeover by an acquirer; and, (2) includes short exposure to global equities as a partial equity market hedge.
• AlphaClone Alternative Alpha (ALFA) – seeks to track price and yield, before fees and expenses, of U.S.-traded equity securities to which hedge funds and institutional investors have disclosed significant exposures. (Dead as of August 2022.)
• IQ Hedge Market Neutral Tracker (QMN) – seeks to track, before fees and expenses, risk-adjusted returns of market neutral hedge funds. (Dead as of January 2023.)
• ProShares Morningstar Alternatives Solution (ALTS) – seeks to track, before fees and expenses, performance of a diversified set of alternative ETFs. (Dead as of April 2022.)
• JPMorgan Diversified Alternatives (JPHF) – aims to provide direct, diversified exposure to hedge fund strategies via a bottom-up approach across equity long/short, event-driven and global macro strategies. (Dead as of May 2020.)
• iMGP DBi Hedge Strategy ETF (DBEH) – seeks long-term capital appreciation via long and short positions in derivatives, primarily futures contracts and forward contracts, across the broad asset classes of equities, fixed income and currencies. (Dead as of September 2024)
• AltShares Merger Arbitrage ETF (ARB) – seeks to track, before fees and expenses, the performance of the Water Island Merger Arbitrage USD Hedged Index, a global merger arbitrage strategy investing in publicly announced mergers and acquisitions.

We focus on monthly return statistics, including compound annual growth rates (CAGR) and maximum drawdowns (MaxDD). We use as benchmarks SPDR S&P 500 (SPY) and a monthly rebalanced (60-40) portfolio of 60% SPY and 40% iShares iBoxx $ Investment Grade Corporate Bond (LQD). Using monthly returns for the 10 hedge fund ETFs, SPY and LQD as available through August 2025, we find that:

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